What are the criteria for commercial property financing?

Private Property South Africa

Andre Theron •
Jul 8, 2015

What bankers look for when providing Commercial Property Finance

Investors who purchase Industrial or Commercial Property will almost invariably need to approach their bank for Commercial Property Finance. Even “cash buyers” tend to use banks to enhance their returns by adding an element of gearing. By the very nature of Commercial Property, the capital values involved are generally much larger than for Residential Property.

This is according to Andre Theron, a director at Baker Street Properties in Cape Town specialising in Commercial Property and Investment Sales. Theron spent some 30 years working in Commercial Property Finance at some of South Africa’s leading Commercial and Private Banks prior to joining Baker Street Properties.

Theron explains that the criteria for finance is a lot more complicated and requires a good solid application with a convincing proposal for why their bank should approve the finance required.

“It is very important for investors to know what questions to expect
from their banker to not only save themselves valuable time but also
to assist in providing the correct information so to properly assess
the viability of the investment and ultimately result in a positive
outcome.”

To help investors prepare for the process in acquiring Commercial Property Finance, he recommends they consider the following:

Bankers generally look at the two important aspects of any application, the client and the deal. This is dealt with in the form of a client-centric and deal-centric approach. Both of which are equally important.

The questions applicable to each approach are as follows:

For the client-centric approach, the banker may ask:

• A detailed Assets & Liabilities Statement of the client will be a good starting point.

• How the client acquired his/her wealth? Was it gained over time, family wealth or otherwise? A brief CV is often very useful.

• The banker needs to understand all the major assets in the client’s portfolio – including site of rental schedules of all other commercial property owned in order to gain a better understanding of current cash flow.

• All financial statements of the client’s various entities need to be analysed to give the banker peace of mind that there are no cash flow concerns in the group that could detrimentally affect the client’s group cash flow.

• What is the client’s debt situation with other banks?

• To what extent is the client able to service debt?

• Can the client still service the debt if there were to be an increase in interest rates?

• The banker will want to determine what the client’s financial goals are for the building – are they buying to improve, buying and selling, building a portfolio or building a property fund?

Deal-centric approach:

• What is the history and current condition of the commercial property?

• Is the building being managed well with no major maintenance or structural issues?

• How long have current tenants occupied the building as a predictor of future tenure?

• What is the financial position and image of the bigger or anchor tenants of the building? If current tenants are in a troubled financial position or there is negative publicity circulating in the media, the bank may warrant the acquisition as a bad investment.

• What do the lease expiry profiles look like? Are there any significant leases expiring in the short term which could result in large vacancies in the near future?

• Location plays an important role when looking at demographics, condition of surrounding buildings, competing new developments in close proximity - and the list goes on.

• Are the running costs/maintenance fees realistic?

• Are the rentals currently gained from the lease(s) market related? If they are above market, there is the risk of a reversion to market rental which could be substantially less than current rental reducing the ability to cover loan repayments.

• Can the net income gained cover the loan repayments?

• Has the buyer included a factor for vacancy provision in his/her cash flow?

• Is this a specialized building such as a gym? If so, what are the relocation intentions of the current tenant since it will be difficult to sell such a building once the tenant has moved out.

For more commercial property insights in high demand areas like Gauteng, have a look at the Private Property website.

For further advice and consultation on investment property or latest news in Cape Town’s commercial property industry, visit www.baker-street.co.za